Pivot point Trading System

When we switch on the business television channels or read business newspapers, we could see market experts discussing about support and resistance levels. So what are these support and resistance levels and how one arrives at it? How to trade using these levels? In this article I’m going to discuss about one of the widely used methods to calculate the support and resistance levels, that is, pivot points.

A pivot point is a price level at which the market is expected to make significant move. Because many traders around the world follow pivot points, you will often find the markets react at these levels giving you an opportunity to trade.

There are many methods to calculate the pivot points, out of which the following four methods are widely used by the market traders. They are,

1.    Classic Method
2.    Woodie Method
3.    Camarilla Method
4.    DeMark Method

Whichever method you are using the underlying concept is, if the market opens above the pivot the bias for the day is positive and vice versa.

The pivot point is calculated using previous day’s open, high, low and close prices. Some markets like forex and commodities trade 24 hours a day, but generally use 5 p.m. EST as open and close timings. Using the OHLC values one can calculate the Pivot points, the resistances and supports.

Benefits of Pivot points

The following are the benefits of pivot points,

Determine Trend: You can use pivot point as a level at which the trend will either change or continue. If the price moves above pivot point then the market sentiment is bullish and vice versa.

Entry and Exit Signals: You can use resistances and supports as entry and exit signals.

Trailing Stop loss: You can either part book your profits at each support and resistance level, or you can place your trailing stop losses at these support and resistance levels.

In the next article I will discuss the formulae for calculating these pivot points and produce some examples on how to trade using pivot points.